Borrower Risk under Alternative Mortgage Instruments

ABSTRACT

This paper analyzes differences in borrower risk under alternative mortgage instruments and various borrower characteristics.
The traditional approach of measuring borrower risk in terms of actual delinquency and foreclosure data is rejected in favor
of a model based on potential delinquency—that is, changes in the mortgage payment to income ratio. The combinations of mortgage
terms and borrower characteristics that are most likely to produce a potential delinquency are isolated based on the calculation
of hypothetical payment to income ratios over an eight year period.